A Workout with Multiple Creditors
A business can make multiple deals simultaneously, but there is no way to force all the creditors into a single settlement outside of bankruptcy. All creditors negotiate individually and they can all decline the deals. All the deals will be separate with their own payment and release terms. Only with bankruptcy can a business force creditors who don’t accept the deal to do so. The effectiveness of debt resolution will depend on the debts the business has, if there is a personal guarantee on the debt, how much the business can afford to make lump sum offers for, and whether any creditors have sued or obtained a judgment against the business.
In a standard multi-creditor settlement program, a business stops making payments to its unsecured creditors and accumulates cash in a separate account. The business then makes an offer to each creditor, in the form of a lump sum payment for less than the full balance. Settlement companies often offer to settle for 30 to 60% of what is owed, and some offer programs that span from 24 to 48 months. No settlement company can promise or guarantee anything in advance. Debt settlement works well for unsecured debts, such as business credit cards, lines of credit, vendor balances and merchant cash advances, as a secured lender is generally able to simply take its collateral. The timing is the Achilles heel of a multi-debt program. As an account fills, any creditor who has not settled is still free to sue.
A Guarantee by an Owner
A personal guarantee by the company owners can be more important than the company liability. A lender that has a guarantee by an owner can generally pursue the owner directly, and the owner is usually not released from their guarantee in a business bankruptcy. This means that every dollar avoided by the company may still be collectible from the owner. A settlement of a guaranteed loan should always include a signed release of the guarantor as well as the business. An owner has access to their own form of bankruptcy. In 2020, a bankruptcy judge in Louisiana allowed Andrew and Christine Blanchard, who had guaranteed the debts of several businesses, to enter into Subchapter V as individuals. The judge refused a creditor’s argument that the guaranteed businesses would also have to enter.
Cash Advance Funders
Merchant cash advance balances are often the most negotiable debts. Some of the contracts may not be enforceable. In a summary order in June 2023, the federal Second Circuit Court of Appeals determined that a cash advance was a usurious loan and affirmed a civil racketeering award for the merchant in Fleetwood Services v. Richmond Capital Group. The Court followed the three-part test in New York. To determine whether an advance is a usurious loan the Court looks to: (1) whether there is a legitimate “reconciliation” clause in the contract allocating between the parties the repayment obligation based on a share of the merchant’s revenue, (2) whether the agreement is for a finite period of time, and (3) whether the funder’s right to collect the advance continues through the debtor’s bankruptcy. Also, in 2019, the State of New York amended its confession of judgment statute (CPLR 3218) to ban cash advance funders from obtaining confessed judgments in New York against out-of-state debtors.
Mass debt voidance by regulators has also occurred. In January 2025 a state court granted a $1.065 billion judgment against Yellowstone Capital and its affiliated entities. The New York Attorney General had brought suit against the company, claiming the company’s advances to 18,000+ small businesses were merely disguised loans. The settlement voided ~$534 million in outstanding balances (including outstanding balances of any personal guarantors) – without any action required on behalf of the merchants. Judgments were voided in ~28 NY counties and Yellowstone along with two execs is banned from the industry. The AG’s claims against other defendants, including Delta Bridge (Cloudfund) survived a motion to dismiss in March 2026.
SBA Loans
Different rules apply to SBA backed loans which are the most complex to deal with in an aggregate settlement. If you are handling SBA loans, you need prior approval from SBA for any settlement for less than the principal on a 7(a) loan (even if you have delegated authority to settle otherwise). SBA requires that if the business wishes to stay open:
- The settlement is needed to prevent the business from shutting down.
- The settlement is part of a deal among all of the borrower’s creditors.
- The settlement terms for each creditor are set out in a written agreement between all of the creditors.
- The SBA has not been treated unfairly compared to the other creditors.
Offers in compromise for the COVID disaster loans have been almost never accepted. If the SBA loan is assigned to Treasury Cross-Servicing, the amount of the loan can potentially have 30% added in collection fees and cannot be returned to SBA.
Tax Consequences
Every dollar forgiven has tax consequences. Canceled debt is generally treated as income under federal income tax law. A creditor who forgives $600 or more must issue a 1099-C and lesser amounts are still taxable. There are two principal exclusions that apply to a workout with multiple creditors. Debt that is canceled in a bankruptcy proceeding is excluded with no dollar limit. Debt canceled outside of a bankruptcy is only excluded to the extent the debtor was insolvent (that is, liabilities were greater than the fair market value of the assets) immediately before the debt is canceled. Thus, if a debtor with $300,000 in liabilities and $250,000 in assets has $80,000 in debt canceled, $50,000 is excluded and $30,000 is taxable. To claim an exclusion, a debtor must file a Form 982 with its tax return, and the exclusion generally reduces other tax attributes such as loss carryovers and asset basis.
All Creditors May Be Treated in One Legal Proceeding
Subchapter V, chapter 11 of the Bankruptcy Code is the main way in which all creditors may be treated in one legal proceeding. A business or individual is eligible if total debt is $3,424,000 or less (as of April 1, 2025), and at least half of its debts are business debts. The debtor must file a plan within 90 days and a Subchapter V trustee is appointed to help the debtor negotiate a consensual agreement. The court may confirm the plan without the affirmative vote of any class of creditors if it is “fair and equitable” and if it commits the debtor’s projected disposable income to the creditors for a period of 3-5 years. The owners of the business do not have to fully pay creditors, as would be required in a traditional chapter 11 proceeding, and may retain their equity in the business.
Double the Subchapter V Debt Ceiling
Congress Has Passed the Bill to More than Double the Subchapter V Debt Ceiling! H.R. 7730 – Bankruptcy Threshold Adjustment Act of 2026 passed the United States House of Representatives on September 16, 2026, by voice vote. The Bill then passed the Senate unanimously. H.R. 7730 (the “Bill”) would permanently fix the Subchapter V debt limit at $7,500,000 (adjusted every 3 years for inflation). It would also eliminate the separate secured and unsecured thresholds for Chapter 13 and impose a $2,750,000 cap.
The Bill was awaiting the President’s signature as of early October 2026 and, pending signature, the $3,424,000 debt threshold will remain. Thus, if your debt is between the two amounts, there is a practical timing question of when you should file for bankruptcy.
Telemarketing Sales Rule
The entity conducting negotiations also carries legal risk. The federal Telemarketing Sales Rule prohibits consumer debt relief companies from receiving fees until a debt has been settled, the customer accepts the deal, and at least one payment has been made to the creditor. Business telemarketing is largely exempt from this rule. In 2024, the FTC finalized amendments that extended its ban on misrepresentations, including misrepresentations of debt relief, to business telemarketing calls, with civil penalties capped at $51,744 per violation. The FTC declined to regulate business telemarketing beyond these changes. In October 2025, the court’s final order permanently barred the Small Business Financing firm Seek Capital from business financing and debt relief for violations of the FTC Act and the Telemarketing Sales Rule. The company was ordered to pay $48.28 million, with most of the judgment suspended due to the inability to pay.
